Rabobank: significant steps towards a better cooperative bank

In 2015, Rabobank Group achieved a net profit of EUR 2,214 million (+20%).

The recovering Dutch economy contributed to a sharp decrease in loan impairment charges. Total loan impairment charges decreased by EUR 1,600 million to EUR 1,033 million (-61%), which is well below the long term average. The number of Dutch clients under special asset management decreased by 11%.

The return on tier 1 capital amounted to 6.5%.

The efficiency ratio excluding regulatory levies remained stable at 62.6%.

On balance, the loan portfolio decreased by EUR 3.5 billion to EUR 426.2 billion. The economic recovery in the Netherlands has not yet produced any noticeable increase in the number of credit applications from businesses.

The market share in trade, industry and services in the Netherlands increased to 42%. The additional repayments on residential mortgages remained at a high level, to the amount of EUR 3.4 billion.

Amounts due to customers increased by EUR 11.3 billion to EUR 337.6 billion. Private savings decreased by 1% to EUR 140.5 billion, in part due to extra repayments on mortgages.

The result was tempered by a goodwill impairment of EUR 604 million for RNA (our retail bank in California).

The contribution to the national resolution fund brought the operating profit before taxation down by EUR 172 million. Bank tax brought the net result down by EUR 172 million.

Fundamental strengthening of the cooperative organisation and establishing a strategic direction with unanimous support.

Culture change: customer satisfaction is key. All employees in the Netherlands took the banker's oath during "Values Week" ("Week van Waarden").

Chairman of the Executive Board Wiebe Draijer:

“As a cooperative bank, Rabobank took a number of significant steps in 2015 that are important to the healthy future of the bank and our members and customers. We simplified our cooperative structure and made it more effective, and established a route towards becoming the most customer focused bank in the Netherlands, as well as a leading global food and agriculture bank. This was preceded by a thorough decision making procedure, in which all of the parties involved in our cooperative were consulted. The result has been unanimous support for the chosen course. Rabobank is proud of this support. It gives us the confidence that we will achieve our goals for our members and customers.”

“The financial results for 2015 provide us with a good foundation from which to make a great success of the chosen approach. Our new business model will produce a better bank and a better cooperative. There are three priorities for the strategic course between now and 2020: excellent customer service, a flexible and even stronger balance sheet and improved financial results.”

“We were able to further improve our customer service in 2015. We have invested heavily in innovation. Customers appreciate our online services more and more and have an increasingly positive opinion of our advisers. Customer satisfaction has risen but has not yet reached the level we are aiming for.”

“We have continued to personalise our online services. We introduced our new Banking App and some 6,000 customers use the app's hugely successful chat function on a daily basis. In 2015, a total of 1.1 million customers used the online Rabobank Mortgage File. The Mortgage File gives us the information we need in advance so that we can give better customised advice in meetings with customers. For our investment clients we have expanded the Rabo Investment App, thereby providing clients with an even greater insight into their portfolio.”

“For payment operations we introduced Rabo SmartPin, an innovative app that makes it possible to pin at the front door. We now also have the Rabo Wallet, a digital wallet that our Dutch customers can use on their smartphones to pay in shops. Since most mobile phones are still not compatible with Rabo Wallet, we also fitted the majority of our debit cards with a contactless payment chip in 2015. A total of 1.8 million customers have since used one of these cards to make payments of up to EUR 25 without having to type in a pin code.”

“Our new and tighter sustainability policy is bearing fruit. In the 'Banking' category of the RobecoSAM global rankings, Rabobank rose from 12th to 5th place with a score of 87 out of 100. According to Sustainalytics, Rabobank climbed from 40th to 11th place in their sustainability ranking list of 422 financial institutions worldwide. In 2015 we also prioritised the transition to a circular economy. The Rabobank Circular Economy Challenge supported eight businesses for one year so that they could develop a circular enterprise business case. Rabobank Brazil received two prestigious awards for the most sustainable bank.”

“With our Banking for Food programme, we want to contribute to sustainably feeding the world's population. Various food and agri sectors have experienced further consolidation in the supply chain. Hereby, Rabobank has actively supported customers with advice and financing solutions.With our clients and partners, we are working internationally on the four dimensions of food security: improving the availability of food, improving access to food, stimulating balanced, healthy nutrition and enhancing the stability of food production. Both Wholesale banking and international Rural and Retail banking have further increased customer satisfaction. More than 2 million small farmers have a future due to access to financing, knowledge and networks via the Rabobank Foundation and Rabo Development.”

“Rabobank is strengthening its position as the bank that is closest to the customer and aims to be a meaningful cooperative that is successful in the long term for members, customers, employees and the society in which the bank operates. Providing excellent customer service through our financial products, knowledge and our network is central to this policy. In 2015, we conducted promising experiments with 'new customer proximity'. The majority of our customers are able to obtain mortgage advice within 24 hours. Over the next year, Rabobank will invest in several new forms of contact points, in addition to the existing bank branches. This will include mobile helpdesks, pop-up stores and advice at home.”

“Being the largest financier of businesses in the Netherlands, Rabobank wants to contribute to stimulating entrepreneurship. The emphasis of our services to businesses will shift towards the role of financial linking pin. With this in mind, we entered into cooperation with the Fundipal crowdfunding platform in 2015. Furthermore, Rabobank frequently acts as a broker for institutional investors who are interested in investing in our Dutch food and agri clients. From 2015 onwards, businesses wanting to check whether their funding plans are realistic can use the funding indicator on www.rabobank.nl. We introduced a new online environment for corporate banking in 2015 for our large corporates and wholesale clients: Rabo Corporate Connect. Via this portal they have access to their accounts, payments and an overview of interest and currency positions, price information and other relevant knowledge. The platform is meant for customers who are located in the Netherlands, are internationally active or have complex product requirements. Rabobank is the first major Dutch bank to provide financial insight and an overview on a single corporate customer platform.”

“We need a significant improvement in performance. This is the only way we will be able to achieve the required return of 8% on invested capital, given the consequences of higher capital requirements. The improvement programme we have started is targeting an increase in gross profits of approximately EUR 2 billion by 2020 (excluding the impact of the balance sheet reduction on our results), to be achieved through cost savings and higher income. Furthermore, the flexibilisation and limitation of the balance sheet should contribute to achieving higher capital ratios. As a result, our efficiency ratio, excluding regulatory levies, will fall towards the 50% mark, which is more in line with other market players. In 2015, this ratio arrived at 62.6% and including the regulatory levies at 65.2%.”

“As a consequence of ongoing programmes, the number of internal and external employees decreased to fewer than 52,000 FTEs in 2015. The local banks in the Netherlands saw a decline in the number of staff. In the period 2016-2018, the number of jobs will decrease by 9,000, mainly in the back office and the supporting services of the bank. This reduction will take place in addition to the ongoing programmes under which 3,000 jobs will be lost in 2016. These radical measures will be implemented in a socially-responsible way, with care and consideration for the individual employee. The reduction in the number of jobs is, on the one hand, a consequence of prioritisation and, on the other hand, of strategic technological developments.”

“In 2016, with the new cooperative organisation and a solid financial foundation, Rabobank will swiftly proceed to give shape to its strategic objectives: excellent customer service, a flexible and stronger balance sheet and improvement in the financial results.”

Domestic retail banking

From an economic point of view, things were better in 2015 for the Netherlands than in 2014. Pretty much across the country, the recovery took hold in the housing market, employment opportunities grew and households' disposable incomes grew. The recovery in business investment remained modest. New loans to businesses were at a low level. In addition, the relatively low interest rate on savings contributed to more households making additional repayments on their mortgages. Under the influence of these developments, the domestic loan portfolio shrank by 3% to EUR 282 billion. Amounts due to customers rose by 2% to EUR 212.4 billion.

The economic recovery was clearly reflected in the trend in the loan impairment charges. These fell by EUR 1,079 million to EUR 343 million. This is mainly the result of the improved economic situation, but also due to some non-recurring adjustments. Loan impairment charges amounted to 12 basis points of average lending, against a long term average of 23 basis points. The number of clients under special asset management decreased by 11%. In a number of Dutch markets that are important for Rabobank - the savings market and the mortgage market - Rabobank retained a strong presence, but did lose market share. The market share in lending to the trade, industry and service sectors rose to 42% and the market share in the food and agri-sector remained stable.

The net profit of the domestic retail banking division amounted to EUR 1,321 million, a rise of EUR 788 million compared to 2014. The strong decrease in loan impairment charges was decisive for the recovery in profits. In 2015, the results of the domestic retail banking business were lower by EUR 89 million because of the contribution to the national resolution fund. In 2014, the non-recurring resolution levy caused a reduction of EUR 274 million in the net profits of the domestic retail banking business. Once again, in 2015, there was a relatively strong fall in the number of employees in the domestic retail banking business. As a result, staff expenses were 7% lower. Income fell due to lower margins on new mortgages and a decline in the loan portfolio.

Wholesale banking and international rural and retail banking

The net result for the wholesale banking division and the international rural and retail banking business for 2015 was a loss of EUR 333 million. This is a decrease of EUR 1,092 million compared to 2014. The main cause was the impairment on goodwill of EUR 604 million with regards to Rabobank National Association (RNA) in California. In addition, loan impairment charges rose by EUR 106 million to EUR 526 million or 53 basis points of the average loan portfolio, with a long term average of 59 basis points. The contribution to the national resolution fund put additional pressure on operating profit before taxation to the sum of EUR 66 million. Just as with the local Rabobanks, the number of employees in the wholesale banking division and the international rural and retail banking business, decreased. This will contribute to the necessary improvement in returns in the years to come.

The loan portfolio increased by EUR 3.6 billion to EUR 98.8 billion, mainly due to currency effects. Food and agri represents 61% of the total loan portfolio. This is an increase of 3 percentage points compared to the end of 2014. Amounts due to customers rose by 7% to EUR 124.4 billion. The joint savings balance of the Internet savings bank in Belgium, Germany, Ireland, Australia and New Zealand was stable and totalled EUR 30.5 billion.

Leasing

In 2015, DLL achieved a net profit of EUR 498 million (+14%). The lease portfolio grew by 8%, partly due to exchange rate effects, to EUR 35.7 billion. DLL further optimised its lease portfolio by focusing more on activities in the industries in which it is specialised. DLL's activities are well spread across 35 countries and 9 sectors. The Dutch activities represent 19% of the lease portfolio. The food and agri share increased to 31%.

Real estate

The net profit of the real estate segment rose by EUR 444 million to EUR 181 million. The loan portfolio arrived at EUR 15.3 billion (-8%). The increased profit is largely due to the sharp fall in loan impairment charges by EUR 566 million to EUR 90 million. Rabobank is undergoing strategic change. This change will see present knowledge and expertise within the group increasingly being bundled. Within this 'One Rabobank strategy' it is fitting to link the proven and valued real estate knowledge, expertise and networks of FGH Bank to those of Rabobank to form a single strong real estate organisation. FGH Bank is therefore to be integrated into Rabobank. In anticipation of this, FGH Bank shares were legally transferred to Rabobank on 31 March 2015 and FGH Bank is no longer part of the Rabo Real Estate Group.

Outlook

Growth returned to the Dutch economy in 2015 and it appears it will continue in 2016. Although this is good news, not all of our customers have benefited from it. Unemployment was on a downward trend due to an improving job market in 2015, but remains relatively high by Dutch standards.The number of households with a mortgage higher than the value of their house is decreasing because of mortgage repayments and rising house prices. The number of households with a mortgage higher than the value of their house showed a sharp drop from 1.15 million in early 2015 to around 730,000 in early 2016, due to repayments and house prices rising. However, the group who is still 'under water' remains relatively large. Although the economy has started to grow again in all sectors, the circumstances are not always good. Construction, for example, is showing strong growth, but it is recovering from a very low position. Health care organisations are still battling the consequences of reforms and spending cuts.

The growth of the global economy will remain weak in 2016, as it was last year. In China, the slowdown in growth will continue, while some important commodity-producing countries, such as Brazil, Argentina and Russia are currently in a recession. The Eurozone continues to see only modest growth, around the level of 2015. This is a very modest recovery level, which masks important differences between countries. Unemployment remains a concern, in particular in Southern Europe where the unemployment level is extremely high. The UK and the US still posted relatively high growth rates. The Dutch economy profits from those rates because these two countries are important export markets for the Netherlands. The prospects for exports are however, accompanied by a great deal of uncertainty. The cooperation between European states is under pressure due to the challenges the current wave of immigration poses, and it is not inconceivable that the internal borders of the European Union will again (temporarily) be closed. The discussion on a possible Brexit is approaching its climax. Furthermore, the financial markets are in turmoil. There is a growing impression that market parties have less and less confidence and no longer believe that the monetary authorities will be able to keep control of the situation. The expectation is that the financial environment will remain turbulent for the time being. If the situation is reflected in a deterioration in confidence in general, there are fears that the economic outlook will have to be revised downwards.

Tax reduction has positively impacted economic growth in the Netherlands. The spending cuts made previously and the ongoing return to economic growth will continue to reduce the budget deficit in 2016. The development of the structural budget balance, however, is approaching the limits of European budget rules. There is no room under those rules to provide further support to the Dutch economy. Dutch businesses are also continuing to invest this year. However, the economic recovery is still too young for many companies to invest. For this reason, investment growth remains moderate from a historical perspective.

The ongoing Vision 2016 and the MARS efficiency programmes will reduce Rabobank's regular operating expenses in 2016. We do expect slightly higher loan impairment charges, despite the economic recovery. This is the result of individual events and non-recurring adjustments that drove the loan impairment charges down in 2015. On the other hand, the contribution to the national resolution fund is expected to be higher than in 2015 and we are also expecting a contribution to the creation of the up-front financed deposit guarantee scheme. Bank tax is expected to remain at roughly the same level as in 2015.